Bernard Madoff Investments Fraud Finance Essay

Many old ages ago a immature adult male got his start on Wall Street, but who knew he would go forth a 65 billion dollar feeling on it. On December, 11 2008 the universe ‘s biggest Ponzi strategy was exposed. This strategy left many really affluent people broke, drove some to make things they ne’er thought conceivable, and it sealed one adult male ‘s destiny. After being discovered, many American ‘s wondered what a Ponzi strategy was, how he got off with it, and who he was. His name: Bernard Lawrence Madoff. Madoff, a name that may now be everlastingly known for the ill fame and negative intension associated with it.

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What is a Ponzi strategy? The Securities Exchange Commission provinces:

A Ponzi strategy is an investing fraud that involves the payment of purported returns to bing investors from financess contributed by new investors. Ponzi strategy organisers frequently solicit new investors by assuring to put financess in chances claimed to bring forth high returns with small or no hazard. In many Ponzi strategies, the fraudsters focus on pulling new money to do promised payments to earlier-stage investors and to utilize for personal disbursals, alternatively of prosecuting in any legitimate investing activity ( “ Ponzi Schemes-Frequently Asked Questions ” ) .

Basically, a Ponzi strategy needs a continual inflow of investors, as there is no other money being invested and no existent additions because the influx of money is traveling towards the fictional return on investings to old clients. A Ponzi strategy has many ruddy flags though. These warning flags include: high investing returns with small or no hazard, excessively consistent returns, unregistered investings, unaccredited Sellerss, close and/ or complex schemes, issues with paperwork, and trouble receiving payments ( “ Ponzi Schemes-Frequently Asked Questions ” ) .

Nine old ages after the worst fiscal prostration in the history of the United States of America, one of the universe ‘s slyest conmen was born in Brooklyn, New York. Bernard Lawrence Madoff was born to Ralph and Sylvia Madoff on April 29, 1938. Ralph and Sylvia were really entrenched center classed Americans of the 1930 ‘s. Bernie ‘s male parent was described as, “ an ambitious scrambler, and at some point he landed a good white-collar occupation at Everlast Sporting Goods Manufacturing Company in Manhattan ” ( Henriques 31 ) . Everlast, a pugilism equipment company was good to make for Ralph, but he strived for more. Leaving Everlast, Ralph began Dodger Sporting Goods, and moved his household to Laurelton, New York, In the 1940 ‘s. Laurelton fit the Madoffs. Bernie went to school at P.S. 156, and was in Boy Scout troop 225. He besides lifeguarded at the local pool the summer. Many believe that Bernie saved five-thousand dollars from this occupation that he would subsequently utilize to get down up Bernard L. Madoff Investments ( “ Bernard Madoff ” ) . Bernie was 13 when he met Ruth Alpern, a beautiful blonde miss that he would finally get married. She was from Laurelton and the girl of Saul Alpern, a successful comptroller who finally helped Bernie acquire his successful start. When Bernie was about 13, the Madoff household was hit by disruptive times. His male parent ‘s clean goods concern filed for bankruptcy and cited the lifting cost of natural stuffs at the oncoming of the Korean War for his problems ( Henriques 31 ) . The bankruptcy took its toll on the household, even seting a revenue enhancement lien of over thirteen-thousand dollars on their place ( Varchaver, Bandler, and Burke ) . This adversity even drove his female parent, Sylvia to happen a clerical occupation, and his male parent Ralph, to take a place in the fiscal industry. Harmonizing to Henriques, Ralph helped “ fledgeling companies find investors in exchange for a fee or a per centum of the money he raised ” ( 31 ) . After his stretch in the fiscal industry, he decided to open up his ain investing concern, Gibraltar Securities, in which Sylvia was alleged to of ran. Ralph is said to hold registered the concern under Sylvia ‘s name because of the revenue enhancement lien that was still on the Madoff household place, but ran the concern himself. Gibraltar Securities lasted from the late 1950 ‘s until August of 1963 when the Securities Exchange Commission ( SEC ) filed an action against 48 houses for failure to describe their fiscal status ( Varchaver, Bandler, and Burke ) . In January of 1964, the SEC dismissed the proceedings for a figure a houses if they would assure to remain out of concern. Many inquiry if Bernie ‘s male parent ‘s moral and ethical oversight in the instance of Gibraltar Securities planted a seed of error and unethical behaviour in him.

Bernie was an mean pupil, and attended at Far Rockaway High School in Queens, New York. After graduating high school, he went to the University of Alabama for a twelvemonth so transferred to Hofstra University where he graduated with a political scientific discipline grade ( Reske ) . After graduating college, Madoff pursued his male parent ‘s involvement for him, jurisprudence school. Bernie went to Brooklyn Law School, but after merely a twelvemonth he dropped out and used the 5,000 dollars from his lifeguarding occupation to get down Bernard L. Madoff Investment Securities in January 19, 1960 ( “ Bernard Madoff ” ) . Madoff seemed to hold gotten interested in the stock market sometime when he was in college. His close friends, the Lieberbaum ‘s may hold been the one to trip his initial involvement in the market. In 1957, Lou Lieberbaum got advice from Jack Dreyfus, one of Wall Street ‘s best investors in the 1950 ‘s and 1960 ‘s to put in Polaroid after touring the works ( 98-100 ) . He did and became a millionaire ( Madoff with the money100 ) .

Bernie started his first trading while he was still in jurisprudence school. At first, he had an office at his now in-law Saul Alpern ‘s accounting house, but finally moved to a twosome of offices at 40 Exchange Place where Ruth kept the books ( Henriques 26 ) . During the 2nd half of his first twelvemonth at Brooklyn Law School, he reported as holding, “ 12 portions of a company called Electronics Capital, worth a sum of $ 300. But by the terminal of 1961, his initial $ 200 interest had grown to $ 16,140, harmonizing to SEC revelations ( James, and Nicholas ) . ” This mass sum speedy hard currency had to assist impel Bernie into trading more. Bernie specialized one the nonprescription stock market. The nonprescription stock market was an unlisted stock exchange in which possible investors would be required to name a stock agent, who would in turn call several different agents seeking a monetary value, as they would change due to no centralised exchange for the market. The agents would have the monetary values on printed Pink Sheets every twenty-four hours of the hebdomad from the National Quotations Bureau ( Henriques 26 ) . The sheets would name 8,000 stock monetary values, of which 2,000 were nonprescription stocks ( Henriques 26 ) . This logistical effort was at a great cost though. A full subscription for the Pink Sheets was $ 460 per twelvemonth, a amount that Madoff could n’t afford at the clip. Madoff relied on twenty-four hours old sheets that he got from a house in the same edifice he worked in at 40 Exchange Place ( Henriques 26 ) . Using the nonprescription market lawfully, Madoff would “ seek to pull large trades to their store by offering to pay clients a penny or two for every portion they traded. His house would do money by pocketing the difference in the ‘spread, ‘ or the spread between the offering and merchandising monetary value for the stocks ” ( Julie, and Landon ) . Madoff continued in the OTC stock concern for many old ages.

Madoff flourished until mid-1962 when he invested in new-issue stocks that were really volatile at the clip. These stocks, similar to the tech stocks of the 1990 ‘s, were really volatile ( Henriques 27-28 ) . Madoff would hold known that he should n’t put his client ‘s money in these stocks as it was against ordinances, and many were “ hazard averse ” ( Henriques 28 ) . Madoff lost large with these stocks in the biggest bead of the stock market since before the Great Depression, but alternatively of having up to his failures, he covered them up. He used the $ 30,000 of his first two old ages net incomes to refund his client ‘s. Then he borrowed municipal bonds from his father-in-law, Saul Alpern, and used them as collateral on a $ 30,000 dollar loan to recapitalize his house ( Henriques 28-29 ) . Madoff recovered but was this close fatal catastrophe shook him for the first clip.

Saul Alpern, the adult male that had merely pulled Bernie out of a rut, began to advance his son-in-laws investing service from his ain CPA house. Alpern found Michael Bienes to be his spouse shortly before retiring. He and Bienes drew many investors to Madoff through a feeder fund, but Alpern shortly retired as Frank Avellino took his topographic point. Avellino & A ; Bienes continued on with the feeder fund after Alpern left, and made a mass sum in committee and enlisting fees. Most cognize their money was traveling to Madoff through the fund ran by Avellino & A ; Bienes. Many ruddy flags were up when investors sought the feeder fund. One missive seized by the SEC from Avellino & A ; Beines stated:

Avellino & A ; Bienes invests with one specific Wall Street Broker ( the same company since we foremost started making concern over 25 old ages ago ) who buys and sells stocks and bonds in the name of Avellino & A ; Bienes. The list of securities being traded are top corporations such as IBM, AT & A ; T, etc. It ‘s the mechanics being used to protect the portfolio that makes our concern successful, non merely the top name securities being traded… We do non promote new histories and therefore we do non beg same. We do, nevertheless, like to suit those persons, etc. that are recommended as you have been through Virginia Atherton. Summarily, this is a really private group and no fiscal statements, prospectuses or booklets have been printed or are available. Let me clear up one of import thing. The money that is sent to A & A ; B is a loan to A & A ; B who in bends invests it on behalf of A & A ; B for which our clients receive quarterly involvement paymentsaˆ¦ The minimal sedimentation is $ 5,000aˆ¦ Interest rate is 16.0 % yearly ( Investigation of Failure 42 ) .

The visual aspect of exclusivity drove a mass demand for the fund, while Avellino & A ; Bienes accepted about any investing with Madoff. The ruddy flags though, were the deficiency of fiscal statements, the investing described as a loan to A & A ; B which would vouch a 16 % involvement output, and the fact that neither Avellino nor Bienes were licensed to be investing agents. Using rearward psychological science and by vouching moneymaking involvement rates in the 1970 ‘s, Avellino & A ; Bienes began to pull investors in droves. Avellino & A ; Bienes both became multi-millionaires, and had fed Madoff more than $ 450 million dollars from around 3,200 investors by its terminal ( 74 ) .

New Madoff investors came and created a mass inflow of money. Stanley Chais, a well-established enterpriser, set up three feeder financess with him, after run intoing through Marty Joel, who had shared office infinite with Bernie in the yesteryear. The feeder financess included the Lambeth Company, the Brighton Company, and the Popham Company which set up in the 1970 ‘s on the rule that Madoff would utilize arbitrage to do steady net incomes of about 10 to 14 % , but failed to be registered with the SEC ( Henriques 57-60 ) . Madoff used riskless arbitrage in his legitimate concern, and is said to hold used in his Ponzi strategy. Arbitrage would hold required the coincident purchase and sale of stock to work the monetary value difference to derive a net income ( “ Investopedia ” ) . Arbitrage was a common instrument that was used to derive little net incomes, but required drawn-out paperwork that Madoff alleged to hasten with a computerized system he had come up with for placing chances to buy preferable stock and short the common stock ( Henriques 59 ) . That may hold been so, because there was no paperwork, or investings at all for that affair. Bernie had besides attracted large names like Carl Shapiro, Norman Levy, and Jeffry Picower, who invested their ain money and recruited feeder financess. He used the same patter of utilizing arbitrage to do his net incomes. This is where Madoff used his clandestine scheme of maintaining investors with the feeling of exclusivity ( which should hold raised many ruddy flags ) . His scheme besides helped maintain the Ponzi afloat, because if everyone knew about the others, the thought of arbitrage would look really less likely, as there is merely so much stock to work at a given monetary value.

In the mid 1980 ‘s Bernie moved to the eighteenth floor of 885 Third Avenue New York, New York. To some, it is known the Lipstick Building for its form. A short clip subsequently he opened up a London based office where he began to make concern globally. In the Lipstick Building and in London, Madoff continued to pull monolithic sums of money through many well-known companies utilizing his turning repute. In 1985, Bernie switched his purported scheme. He began arousing investors that he was now utilizing a more complex scheme called the “ split work stoppage transition ” . Harmonizing to Henriques, his split work stoppage transition was simply a stock option. She stated:

A stock option is merely a contract that gives its purchaser the right to purchase or sell that stock at a specific monetary value for a specific period of clip. Much less expensive than the existent stocks, options gave speculators a cheaper manner to wager on lifting prices-an option that allowed them to purchase a stock for $ 10 a portion was a victorious stake if the stock rose to $ 20 a portion before the option expired ( 75-76 ) .

Most of Bernie ‘s investors were large Bankss that set up feeder financess for investors that bought into this scheme, or merely overlooked the impossibleness of making such a scheme at a big graduated table. These big Bankss would merely hand-over money to Madoff, and he would return guaranteed percentages up to 46 % ( Millestone ) . The SEC requires investors to make their ain due diligence, intending they should look into the companies they invest with, but with Madoff, no 1 seemed to care. It was hard to reason with consequences. Through many disruptive times in the stock market Madoff ne’er one time missed a guaranteed return. While he made this expression easy, many times he was strapped for hard currency. Many investors did non even know that they were puting with Madoff as they went through big feeder financess that would take attention of their client ‘s investings. Madoff ‘s investor ‘s list included:

Farfield Greenwich, an investing direction house, of which $ 7.5 billion dollars was exposed, Tremont Group Holdings, an plus direction house of which $ 3.3 billion dollars was exposed, Banco Santander, a Spanish bank, of which $ 2.87 billion dollars was exposed, Bank Medici, an Austrian bank of which $ 2.1 billion dollars was exposed, Ascot Partners, An Ezra Merkin hedge fund, of which $ 1.8 billion dollars was exposed, Access International Advisors, A New York based investing house, of which $ 1.5 billion dollars was exposed, Fortis, a Dutch bank of which $ 1.35 billion dollars was exposed, Union Bancaire Privee, a Swiss bank, of which $ 700 million dollars was exposed, HSBC, a British bank, of which $ 1 billion dollars was exposed, Natixis SA, a Gallic investing bank, of which $ 554.4 million dollars was exposed, Carl Shapiro ( mentioned on page 6 ) , the laminitis of an dress company, of which $ 500 million dollars was exposed, Royal Bank of Scotland Group PLC, a British bank, of which $ 492.76 million was exposed, BNP Paribas, a Gallic bank, of which $ 431.17 million dollars was exposed, BBVA, a Spanish bank, of which $ 369.57 million dollars was exposed, Man Group PLC, a U.K. hedge fund, of which $ 360 million dollars was exposed, Reichmuth & A ; Co. , a Swiss private bank, of which $ 327 million was exposed. Normura Holdings, a Nipponese securities firm house, of which $ 358.9 million dollars was exposed, Maxam Capital Management, a fund based in Darien, Connecticut, of which $ 280 million dollars was exposed, EIM SA, a European investing director, of which $ 230 million dollars was exposed, and AXA SA, a Gallic insurance giant of which will under a‚¬100 million Euros was exposed ( “ Wall Street Journal ” ) .

This list is simply 20 of his biggest investors. There were many more investors who may be more recognizable to the mundane citizen. These names include: Talk show host, Larry King. Former L.A. Dodger, Sandy Koufax. Actor, Kevin Bacon. Actress, Zsa Zsa Gabor. New York Met ‘s proprietor, Fred Wilpon. Madoff even stooped so low to steal from many Judaic charities including one created by holocaust subsister, and writer, Elie Wiesel.

Madoff claims to hold started his Ponzi in 1992, but in recent studies ( October 2, 2012 ) prosecuting officers now believe that Madoff ‘s Ponzi strategy started in the 1970 ‘s ( Riley ) . Madoff ‘s Ponzi got so large that he had to lease more infinite in the Lipstick Building. He kept the eighteenth floor for his legitimate operations, moved his Ponzi strategy to the 17th floor which was headed by Frank DiPascali, and used the 19th floor for his office infinite. DiPascali was Madoff ‘s spell to ridicule from the beginning of the strategy. He is the 1 that made the fictional stock certifications whenever they were needed for an probe. He used an old IBM computing machine signifier the 1980 ‘s to make this, and until the twenty-four hours the Ponzi collapsed in December of 2008, Madoff still had the antiquated computing machine on the seventeenth floor. Who was Madoff ‘s Auditor? While so many assets, and capital, was it a Big Four house? No, it was n’t. It was David Friehling, CPA of Friehling & A ; Horowitz, a two adult male accounting house of which operated from a 13 by 18 pes office in Rockland County, New York ( Blodget ) .

Madoff was faced with a few close calls along the manner as good. One was Harry Markopolos. Markopolos was a fiscal analyst for a house that was a rival of Madoff ‘s. Markopolos was assigned the undertaking to look into what Madoff was making with his tremendous unregistered hedge fund by reverse-engineering its trading gross streams to double Madoff ‘s consequences ( “ 60 Minutes ” ) . When Markopolos was asked how long it took him to calculate out that Madoff was a fraud he stated, “ It took me five proceedingss to cognize that it was a fraud. It took me another about four hours of mathematical mold to turn out that it was a fraud. ” When he looked at Madoff ‘s investings he said that merely four per centum of the months were a reported loss. He compared that to a batting norm of.960 in baseball in which you would instantly cognize that person was rip offing or that it was impossible. Markopolos sent in his findings to the SEC five times, May 2000, October 2001, October, November, and December 2005, and April 2008 ( “ 60 Minutes ” ) . Markopolos finally sent his findings to Barron ‘s Magazine which published an article about his findings. The SEC failed to look into these findings, but alternatively began to look into Madoff for insider trading, and therefore found nil. How could Madoff get away the SEC even though he was n’t doing a individual trade? Madoff had DiPascali use the IBM computing machine from the 1980 ‘s to hammer paperss to do them look like they were legitimate. Madoff was investigated in 2001, and 2003. At one point he gave the SEC his Depository Trust Company codes that would corroborate, or in his instance deny that he had been doing the said figure of trades and investings. After making this Madoff was certain that he was caught, but nil came of it. The SEC did n’t look into the DTC clearinghouse at all. They took Madoff ‘s paperss from DiPascali as the truth without look intoing their legitimacy.

With the fiscal prostration of 2008 came Bernard Madoff ‘s prostration. Madoff was confronting salvations of $ 1.5 billion dollars merely a hebdomad before his prostration, but merely had $ 300 million dollars left as his hard currency flow had disappeared due to the turbulent times ( Henriques 208 ) . Confronting an about ruin Madoff ordered $ 137 Million dollars of what he had left be sent in the signifier of a cheque to his closest household members and investors. The cheques were written but ne’er sent out. On December 10, 2008 Madoff allegedly called his brother Peter, his Chief Compliance Officer, and his two boies Andrew, and Mark into a meeting to squeal about what he had done since 1992. After hearing his confession the two boies went straight to the SEC with their attorneies and turned their male parent in. Madoff was arrested on December 11, 2008 after squealing to the SEC of his actions. He purported that he was the lone one to hold known about the fraud but we now know this is non the instance.

Bernard Madoff Investment Securities officially filed for bankruptcy on December 15, 2008 and the work of the Securities Investor Protection Corporation began. The SIPC worked and is still working to acquire back money that investors lost. After naming Irving Picard the legal guardian to the Madoff victims he began to action for clawbacks. He saw Madoff ‘s investors as net victors and net also-rans. A net victor was anyone who received more money than they ab initio invested with Madoff, and a net also-ran was anyone who received less than they invested with Madoff. Picard ‘s thought was to action for the clawbacks from the net victors to administer to the net also-rans. He had two old ages file all of the suits from December 11, 2008. His major suits included clawbacks in the sum of $ 3.5 billion dollars form the Fairfield Sentry financess, and $ 7.2 billion dollars form Jeffry Picower ( Henriques 257 ) . Harmonizing to Picard the existent sum of money taken from investors sums to around $ 17.3 billion dollars. The other $ 45 billion dollars that Madoff took was all fictional paper net incomes that he created from his Ponzi Scheme. As of October 21, 2012, Picard has recovered $ 9.215 billion, and distributed $ 2.89 billion of it ( “ Madoff Trustee ” ) . A bulk of the $ 9.215 billion was from Saul Katz, Trotanoy Investment Company, Ltd. , IRS, Mount Capital Fund, Tremont Group, Greenwich Funds, Fairfield Funds, Hadassah, Union Bancaire Privee, Carl J. Shapiro, Jeffry Picower, Norman F. Levy, and Optimal. Irving Picard ‘s recovery has n’t gone without great compensation. Picard ‘s house is charging his services at $ 850 an hr and has presently earned $ 601.8 million in fees.

Bernard Madoff pled guilty to: Count one, securities fraud: Count two, investing adviser fraud: Count three, mail fraud: Count four, wire fraud: Count Five, international money laundering to advance specified improper activity: Count six, international money laundering to hide and mask the returns of specified improper activity: Count seven, money laundering: Count eight, false statements: Count nine, bearing false witness: Count 10, doing a false filing with the Securities and Exchange Commission: Count 11, larceny from an employee benefit program ( “ Eyewitness News 7 ” ) . Madoff was sentenced to 150 old ages in federal prison and now spends his yearss at a federal penitentiary in Butler, North Carolina. Peter Madoff pled guilty to charges of confederacy and falsifying investing records and could confront up to 10 old ages in prison. Daniel Bonventre, Madoff ‘s manager of operation, “ concealed the fraud through use of the house ‘s general leger, fiscal statements and sock recordsaˆ¦ he faces 22 counts ” ( Riley ) . Jerome O’Hara and George Perez were Madoff ‘s computing machine coders who allegedly helped distort books by composing algorithms to alter history names, and the figure of portions and dealing Numberss ( Riley ) . Annette Bongiorno one of Madoff ‘s history directors faces 10 counts of assorted charges, and Joann Crupi who tracked day-to-day bank history activity faces 13 counts of assorted charges. ( Riley ) . Dipascali and frihling.


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